Life happens, whether you’ve saved for it or not. Many times credit is a valuable safety net to help you ride out financial emergencies such as hospitalization or a tool to finance a purchase such as a latest mobile gadget, vacation or small home improvement project. In such cases, if one wants to borrow money other than from family and friends credit cards and personal loan are two options. Though credit cards are convenient, in some cases a personal loan may be a more sensible and affordable way to pay for a large purchase over time. Let’s look at these two options in detail and do the comparison of Personal Loans and Credit Cards.
What are Personal Loans?
Personal loan as the same says is given to individuals for their own personal expenses. It is generally taken by borrowers who are looking for loans quickly and with minimum documentation. Salient features of personal Loans are given below. Our article Personal Loans Basics discusses it in detail
- It is unsecured in nature, i.e. the borrower does not need to bring in any collateral, hence the personal loan interest rates are higher than those of other secured loans.
- Since there is no collateral, there is not much documentation or physical verification to be done. All that is needed is ID proof, Income proof, Address proof and Job Stability Proof of the borrower to apply for a personal loan
- You receive the loan amount in a lump sum.
- You make EMI or fixed monthly payments for the term you took the loan.
- There is no penalty for paying off the loan early.
- These, you can apply for a personal loan entirely online. To apply, you’ll need to provide your personal and employment information on an online credit application. The bank may ask to see proof of your income, such as a payslip Generally, the bank will let you know if you’re approved within two-three business days.
- Example of the personal loan, charges, process is the link HDFC Bank Personal Loan
What are Credit Cards?
Credit Card is a small plastic card that is issued by financial institutions such as banks. As the name, Credit suggests when one buys using a credit card, one is taking a loan. A credit card is what’s known as revolving debt. A credit card has a credit limit that you can use as often as you like and it’s up to you to pay the entire balance off at the end of the month. If you don’t, you begin to “carry a balance”—you’re paying interest on a debt but you still have the ability to make new purchases.
One needs to pay back later(there are no free lunches in life!). There is a limit to which one can buy on credit card. So, even if you have only Rs 10,000 in your account but your credit limit is Rs 50,000, you are free to spend up to Rs 50,000. You could also have Rs 1,00,000 in your account, but your credit limit is only Rs 50,000. You need to repay the amount bought on credit by a due date. Our article Debit Cards and Credit Cards: Plastic money discusses it in detail.
Comparison of Personal Loans and Credit Cards
Both Personal loans and credit cards are unsecured and there is no collateral involved. The following table shows the comparison of Personal Loans and Credit Cards.
| Issuing Authority | Credit card is issued by banks or financial institutions. | You don’t even need to be a customer of the bank. Being bank’s customer, though, can get you more favourable terms on your personal loan |
| A personal loan is a fixed debt. You receive a fixed amount of money and repay it in equal instalments over a fixed number of months | ||
| Size of Loan | Most credit card limits are smaller in size. Maximum is usually around Rs 2 lakh | Banks offer personal loans for higher amount up to 15 lakhs (or 30 lakhs) |
| Fixed/Variable | Variable amount within credit limit depending on your card usage in the month | Fixed amount issued once |
| Interest rate | Credit card loans are availed at flat interest rates,
Monthly interest for flat rate loans is applied on the initial loan amount and it remains the same for the entire duration of the tenure, even though the principal amount decreases. |
Personal loans are available with reducing balance rates.
Hence, the interest outflow decreases as and when the principal is paid. |
| Processing Fee | Credit cards charge a nominal fee for issuing credit card(often free in the first year and then charged annually) | Personal loan borrowers may have to pay processing fees that is equal to all other loans. It may range between Rs 5,000 and Rs 10,000. |
| Diligence | Credit card lenders do not do due diligence every time your require to borrow. | It is done every time you apply for a personal loan. |
Credit cards are best for making smaller purchases or consolidating smaller debts—up to a few thousand Rupees —that you can comfortably repay within a year.
Personal loans are best for larger purchases that will take you more than a year to repay
After comparing both loans, you can make a choice based on your financial need, the time frame for which you need the loan and how soon you need it.
Related Posts:
- Debit Cards and Credit Cards: Plastic money
- Personal Loans Basics
- Credit Card Fees and Charges
- History of Credit Cards : How credit cards have evolved
- What happens when credit card is swiped?
Credit card loans are now at reducing balances.
Verify this and review the relevant portion.
Credit card loans are availed at flat interest rates,
Monthly interest for flat rate loans is applied on the initial loan amount and it remains the same for the entire duration of the tenure, even though the principal amount decreases.
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